Delta Connection snubbed one corporate sibling as it allocated 45 regional jets to three regional airlines. It split the order of 45 50-seat regional jets between Bombardier [BBD] and Embraer [ERJ].

Delta will provide Atlantic Southeast Airlines, a subsidiary of Delta Air Lines [DAL], with 25 new CRJ200s. Seven new CRJ200s will be allocated to SkyWest [SKYW]. The aircraft will be delivered beginning next year. The Bombardier deal was priced at $780 million.

The all-Embraer carrier, Chautauqua Airlines, was awarded 13 ERJ145s. Altogether the Indiana-based unit of Republic Airlines will be flying 47 planes for Delta Connection. The first of the new Embraer planes should arrive in May with the last to arrive in September 2004.

Left out of the in the cold was Comair, another subsidiary of Delta. "We put in the best bid we could and obviously the decision was that we are not getting any of the planes," said Nick Miller, a spokesman for Kentucky-based Comair.

The decision to award the planes to Atlantic Southeast, SkyWest and Chautauqua was based on bids submitted in December when Delta Connection solicited proposals from eight regional airlines (CRAN, Dec. 15, 2003). In addition to seeking bids from its current code-share partners, Delta invited ExpressJet [XJT], Horizon Air, Mesa Air [MESA] and Pinnacle Airlines [PNCL] to vie for the planes.

The carriers selected to fly the "growth jets" were "chosen based on their cost competitiveness, ability to offer the operational flexibility needed to respond to ever-changing market conditions and a commitment to operational service levels," said Fred Buttrell, CEO of Delta Connection.

Of the three airlines, only SkyWest reports its quarterly operating costs. In December, SkyWest reported its costs per available seat mile were 13 cents.

"We looked at the process and criteria," said Delta Connection spokesman Tanya Wagner. "Unfortunately Comair was not awarded the aircraft. At this time, their cost competitiveness just didn't work out."

"Obviously the airline is disappointed that we won't be getting any of these growth jets," Miller told CRAN. "It is one setback in our growth strategy. What it means is that we have more work to do on our initiatives that we already have under way."

With an award of 25 jets, Atlantic Southeast President W.E. 'Skip' Barnette said Delta "recognizes ASA's competitive cost structure and the continuous improvements we are making in customer service quality and operational excellence."

According to one Wall Street analyst, who asked not to be named, Delta is continuing the old divide-and-conquer routine. It does not want one of its regional partners - and even more importantly one union group - to become too big and powerful enough to dictate contract terms. In particular, the decision will drive a wedge between Comair and Atlantic Southeast. Delta is punishing Comair for its high labor costs while setting the stage to possibly spin-off Atlantic Southeast, the analyst told CRAN.

The pilot unions at both airlines had petitioned Delta to merge the two regional carriers into one unit. The union insisted that economies of scale could have produced a more cost competitive airline. The unions wanted the merger so that the new unit could seek all 45 regional jets. Both carriers had asked for concessions, which both unions rejected.

The last thing Delta wants, the analyst said, is for the two pilot unions to merge if the carriers merge.

At SkyWest, the company would not comment on its successful bid. In January, the company and observers speculated that the Utah-based carrier could get up to half the orders. SkyWest does not have a current partnership pact with Delta. The company said there was some efforts by Delta to combine the partnership contract with the jet bid. Neither side would say if a new contract was also reached.

By handing Chautauqua 17 new planes, the analyst said, Delta has recognized that the privately held Chautauqua has the lowest operating costs.

"We are very pleased," said Chautauqua spokesman Warren Wilkinson. The airline got nearly every jet it requested.

>>Contact: Tanya Wagner, Delta Connection, (404) 677-6266; Nick Miller, Comair, (859) 767-2832; Warren Wilkinson, Chautauqua, (317) 710-4323.<<